STARWOOD WAYPOINT, COLONY AMERICAN HOMES IN TALKS TO MERGE

By Ryan Dezember

Two big owners of single-family rental homes are in talks to merge, a bet that rents will keep rising and homes will remain difficult for many Americans to buy.

Starwood Waypoint Residential Trust, a publicly traded real-estate investment trust run by Barry Sternlicht, the longtime real-estate investor who is Starwood Capital Group’s chief executive, plans to combine with closely held Colony American Homes Inc., according to people familiar with the talks.

The possible deal values Colony at about $1.5 billion based on Starwood Waypoint’s closing share price Friday. Barring a last-minute snarl, the merger could be announced as soon as Monday, these people said.

The two companies own a combined total of more than 31,000 homes valued at nearly $8 billion. Messrs. Sternlicht and his counterpart at Colony, Thomas Barrack Jr., were part of the rush by big investors to buy foreclosed homes in bulk, often sight unseen and at steep discounts, after the U.S. housing market collapsed.

Such investors concentrated their buying in some of the hardest-hit areas, including southern Florida, Phoenix, Atlanta and California, hoping to gain enough size in each market to make management of the properties more efficient.

Other major buyers of single-family rental homes include Blackstone Group LP, which has spent nearly $10 billion to acquire and spruce up about 50,000 foreclosed homes now rented through its Invitation Homes LP.

The proposed merger of Starwood Waypoint and Colony is a bet that the percentage of Americans who own homes will remain unusually low. While the foreclosure crisis has receded, toughened lending standards have pushed millions of Americans out of the homebuying market.

Higher interest rates would increase borrowing costs and make it harder for some renters to buy homes.

The Federal Reserve decided last week not to raise short-term interest rates from near zero, where they have held since 2008, but the central bank is expected to revisit the matter later this year.

The U.S. homeownership rate is at its lowest level in nearly 50 years, falling to 63.5% in the second quarter, according to the Commerce Department.

In contrast, single-family rentals now add up to 13% of overall housing stock, up from 9% in 2005, according to a report by Moody’s Analytics.

Rents have been climbing steadily, though some analysts and investors question how long it can last, especially in areas with weak wage growth. Many of the rental homes scooped up by big investors are in those parts of the U.S.

The single-family rental home business was long dominated by mom-and-pop operators. Big investors have used their access to capital and number-crunching skill to barrel into the market. Starwood Waypoint touts algorithms it has developed to guide decisions that include which neighborhoods to target.

The response from stock-market investors has been mostly tepid so far.

As of Friday, Starwood Waypoint shares were down about 20% since its spinoff from Starwood Property Trust last year. Shares of American Homes 4 Rent, which owned 37,491 homes in 22 states as of June 30, have risen 2.7% since their stock-market debut in August 2013.

Blackstone executives have said they plan to eventually list shares of Invitation Homes through an initial public offering.

Bond buyers have been more enthusiastic, snapping up the debt issued by some companies in the sector.

In the two years since Blackstone’s Invitation Homes sold the first bond backed by rents from a pool of houses, $13 billion of such bonds have been sold, according to Kroll Bond Rating Agency Inc.

Single-family rental companies must convince investors that the single-family rental model will remain viable if homeownership levels rebound. Some outsiders also question how much more firms like Blackstone, Colony and Starwood Waypoint can grow now that so many of the most deeply discounted foreclosed homes have been purchased.

Single-family rental companies also face questions about their ability to maintain tens of thousands of scattered properties. The chores include cutting lawns, fixing sinks, insurance and keeping track of rental rates and payments.

In June, Starwood Waypoint said the company and other institutional investors owned roughly 200,000 of the 15.3 million U.S. rental homes, suggesting significant room for expansion if other conditions are ripe.

Executives at Starwood Waypoint and Colony believe that combining the two companies would boost investor comfort and confidence in the single-family rental home business, according to people familiar with the merger talks.

The two companies believe that a merger would result in as much as $50 million in cost reductions, according to people familiar with the matter.

If the deal goes through, Colony investors would own 59% of the combined company’s shares, while Starwood Waypoint shareholders would own 41%. Starwood Waypoint would issue new shares as part of the merger.

Terms of the proposed deal call for Messrs. Sternlicht and Barrack to share chairmanship of the combined company.

Write to Ryan Dezember at ryan.dezember@wsj.com

Breaking the story

Ryan Dezember was first to report that REIT Starwood Waypoint Residential Trust plans to plans to combine with closely held Colony American Homes Inc., according to people familiar with the talks. The companies confirmed the agreement early Monday.

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